India’s Economy Prior to the Country’s Independence

India had an independent economy before the advent of the British rule.

Though agriculture was the main source of livelihood for most people, yet, the country’s economy was characterised by various kinds of manufacturing activities.

India was particularly well known for its handicraft industries in the fields of cotton and silk textiles, metal and precious stone works etc.

These products enjoyed a worldwide market based on the reputation of the fine quality of material used and the high standards of craftsmanship seen in all imports from India.

The economic policies pursued by the colonial government in India were concerned more with the protection and promotion of the economic interests of their home country than with the development of the Indian economy.

Such policies brought about a fundamental change in the structure of the Indian economy — transforming the country into a net supplier of raw materials and consumer of finished industrial products from Britain.

Obviously, the colonial government never made any sincere attempt to estimate India’s national and per capita income.

Some individual attempts which were made to measure such incomes yielded conflicting and inconsistent results.

Among the notable estimators — Dadabhai Naoroji, William Digby, Findlay Shirras, V.K.R.V. Rao and R.C. Desai — it was Rao whose estimates of the national and per capita incomes during the colonial period were considered very significant.

The country’s growth of aggregate real output during the first half of the twentieth century was less than two per cent.


Agricultural sector

India’s economy under the British colonial rule remained fundamentally agrarian — about 85 per cent of the country’s population lived mostly in villages and derived livelihood directly or indirectly from agriculture.

However, despite being the occupation of such a large population, the agricultural sector continued to experience stagnation and, not infrequently, unusual deterioration.

This stagnation in the agricultural sector was caused mainly because of the various systems of land settlement that were introduced by the colonial government.

Particularly, under the zamindari system which was implemented in the then Bengal Presidency comprising parts of India’s present-day eastern states, the profit accruing out of the agriculture sector went to the zamindars instead of the cultivators.

The main interest of the zamindars was only to collect rent regardless of the economic condition of the cultivators; this caused immense misery and social tension among the latter.

There was, of course, some evidence of a relatively higher yield of cash crops in certain areas of the country due to commercialization of agriculture.

But this could hardly help farmers in improving their economic condition as, instead of producing food crops, now they were producing cash crops which were to be ultimately used by British industries back home.

India’s agricultural production received a further set back due to the country’s partition at the time of independence.

A sizeable portion of the undivided country’s highly irrigated and fertile land went to Pakistan; this had an adverse impact upon India’s output from the agriculture sector.

Particularly affected was India’s jute industry since almost the whole of the jute producing area became part of East Pakistan (now Bangladesh).


Industrial sector

As in the case of agriculture, so also in manufacturing, India could not develop a sound industrial base under the colonial rule.

India’s handicraft industries declined during the Colonial period.

The primary motive of the colonial government was to reduce India to the status of a mere exporter of important raw materials for the upcoming modern industries in Britain.

During the second half of the nineteenth century, modern industry began to take root in India but its progress remained very slow.

Initially, this development was confined to the setting up of cotton and jute textile mills.

The cotton textile mills, mainly dominated by Indians, were located in the western parts of the country, namely, Maharashtra and Gujarat.

The jute mills dominated by the foreigners were mainly concentrated in Bengal.

The iron and steel industries began coming up in the beginning of the twentieth century.

The Tata Iron and Steel Company (TISCO) was incorporated in 1907.

A few other industries in the fields of sugar, cement, paper etc. came up after the Second World War.

However, there was hardly any capital goods industry to help promote further industrialisation in India.

Capital goods industry means industries which can produce machine tools which are, in turn, used for producing articles for current consumption.

The growth rate of the new industrial sector and its contribution to the Gross Domestic Product (GDP) remained very small.

Another significant drawback of the new industrial sector was the very limited area of operation of the public sector.

This sector remained confined only to the railways, power generation, communications, ports and some other departmental undertakings.


Foreign trade

India has been an important trading nation since ancient times.

But the restrictive policies of commodity production, trade and tariff pursued by the colonial government adversely affected the structure, composition and volume of India’s foreign trade.

Consequently, India became an exporter of primary products such as raw silk, cotton, wool, sugar, indigo, jute etc. and an importer of finished consumer goods like cotton, silk and woolen clothes and capital goods like light machinery produced in the factories of Britain.

For all practical purposes, Britain maintained a monopoly control over India’s exports and imports.

As a result, more than half of India’s foreign trade was restricted to Britain while the rest was allowed with a few other countries like China, Ceylon (Sri Lanka) and Persia (Iran).

The opening of the Suez Canal further intensified British control over India’s foreign trade.

The most important characteristic of India’s foreign trade throughout the colonial period was the generation of a large export surplus.

This export surplus did not result in any flow of gold or silver into India.


Demographic condition

Various details about the population of British India were first collected through a census in 1881.

Before 1921, India was in the first stage of demographic transition.

The second stage of transition began after 1921. However, neither the total population of India nor the rate of population growth at this stage was very high.

The overall literacy level was less than 16 per cent.

Out of this, the female literacy level was at a negligible low of about seven per cent.

Public health facilities were either unavailable to large number of population or, when available, were highly inadequate.

Consequently, water and air-borne diseases were rampant and took a huge toll on life.

The overall mortality rate was very high and in that, particularly, the infant mortality rate (IMR) was quite alarming—about 218 per thousand.

Life expectancy was also very low—32 years.


Occupational structure

During the colonial period, the occupational structure of India, i.e., distribution of working persons across different industries and sectors, showed little sign of change.

The agricultural sector accounted for the largest share of workforce, which usually remained at a high of 70-75 per cent while the manufacturing and the services sectors accounted for only 10 and 15-20 per cent respectively.

Another striking aspect was the growing regional variation.

Parts of the then Madras Presidency (comprising areas of the present-day states of Tamil Nadu, Andhra Pradesh, Kerala and Karnataka), Maharashtra and West Bengal witnessed a decline in the dependence of the workforce on the agricultural sector with a commensurate increase in the manufacturing and the services sectors.

However, there had been an increase in the share of workforce in agriculture during the same time in states such as Orissa, Rajasthan and Punjab.



Under the colonial regime, basic infrastructure such as railways, ports, water transport, posts and telegraphs did develop.

However, the real motive behind this development was not to provide basic amenities to the people but to sub-serve various colonial interests.

The British introduced the railways in India in 1850 and it is considered as one of their most important contributions.

The railways affected the structure of the Indian economy in two important ways.

On the one hand it enabled people to undertake long distance travel and thereby break geographical and cultural barriers while, on the other hand, it fostered commercialisation of Indian agriculture which adversely affected the comparative self-sufficiency of the village economies in India.

Along with the development of roads and railways, the colonial dispensation also took measures for developing the inland trade and sea lanes.

However, these measures were far from satisfactory.